Banks No Longer Approving Home Equity Loans

Failed ATMs

Once upon a time, your home’s equity was the equivalent of an ATM machine. You could walk into any bank and get started to borrow money against the equity of your home. Banks were also flashy in their advertisements, asking people to borrow on their home equity for any reason under the sun. Now it seems that the home equity ATM has switched itself off as though some virus attacked it. The loans to buy the flashy cars, TVs and home improvements are no longer available, and many people cannot just borrow for any purpose anymore. Have these loans suddenly been stopped? No, banks are just more choosy about who they lend to.

Reason to Hold Back

At the height of the real estate bubble, banks were flush with funds and wanted to entice people into taking out further loans on the equity they held against their homes. Flashy advertisements offering second mortgages to people gave a number of reasons why more loans should be taken out, including home improvements, education, and purchase of luxury goods to make their point. Consumers were also happy to take out the loans, because they could live the good life without too much difficulty. Things changed when the real estate market slumped and the recession became evident, as property prices and incomes plummeted, leading to defaults on mortgages. People who had borrowed money as a second mortgage began seeing many difficulties with their finances, as they now had to deal with two payments instead of one. Household incomes started dipping as well, and banks finally decided to pull the plug when unemployment started increasing along with defaults on mortgages.

No More ATMs

With falling prices of properties, people found that the value of their homes had declined as well. While they had already borrowed the money they wanted, they found themselves unable to repay these loans when they came due. Many people got a renegotiated settlement plan from their banks, while others were not so lucky. The people who took out home equity loans are now having to pay back two loans in a time when their incomes have decreased, making their future outlook bleak and discouraging. What happened to the ATM from their home’s equity? It’s completely gone, along with their futures.

High Risks to Lenders

People who borrowed money on their home equity do not realize that these lenders are at risk of losing their entire investment in the case of a foreclosure. Yes, they probably paid higher fees to get the money and may also have kept up their part of the bargain. However, in the event of a foreclosure, it is the primary lender who has the first dibs on any proceeds received from the sale of the property. Under these circumstances, it is natural for the lenders to put the brakes on such loans. Where does that leave the consumer?

As things stand at the moment, it certainly looks like the borrower is left in a difficult cash crunch. They will need to talk to different people, and come up with a suitable action plan to sort out the mess that they have gotten themselves into. Returning the borrowed money is after all the primary objective, in comparison to losing the home.